Thursday, September 8, 2011

The ongoing expansion of U.S. exports continues to be very impressive. As the top chart shows, exports have been growing at strong double-digit rates for over two years, recovering their former pre-recession growth rates and far surpassing their pre-recession high levels. Exports are now at an all-time record 13.3% of GDP, which is almost triple the size of just 25 years ago. This is the mark of an economy that is truly "globalizing."

For the bean counters (hint: whether we have a trade surplus or deficit is largely irrelevant to the overall health of the economy), imports have not grown relative to GDP for quite a few years (a reflection of generally weak domestic demand), while exports continue to grow (a reflection of strong global demand); thus net exports have made a significant contribution to GDP. Reminder to all: given that our imports still exceed our exports (i.e., we still have a trade deficit), if foreigners were to stop purchasing our debt, then they would have no alternative but to purchase more of our goods and services and/or more of our stocks and/or more of our real estate. All the money foreigners earn by selling us goods and services must, at the end of the day, be spent on something here in the U.S. So the concerns that, for example, China might stop purchasing massive quantities of our federal debt are misplaced, since if that were to happen then it is very likely that our exports would increase.

The NY Fed model is based on the observation that the economy has never entered a recession when the yield curve is as steep as it is today. A steep yield curve is symptomatic of easy money. Every post-war recession has been preceded by a flat or inverted yield curve (i.e., by tight money). Monetary policy is easy today, thus a recession is highly unlikely. I see little reason to disagree with that, especially given the large amount of idle resources in the economy which can quickly be put back to work. By the same logic, lots of idle resources are a sign that there has been lots of restructuring and cost-cutting, and this acts like a buffer against economic weakness.

The trade-enhacing exchange rate of the dollar is working; trade is growing, and exports surging.

BTW, yes, if we import, something has to happen to the money, it has to come back to us, but it can also come back largely in the form of IOUs (meaning we owe, and start paying interest on what we owe).

Over-leveraged economies tend to be fragile.

Of course, one could argue than that the value of the IOUS (bonds) will simply start shrinking, no worries, if it looks like we cannot honor our debts.

Also, the US dollar is a reserve currency, and we can always just print more money to pay our offshore IOUs.

Something has always struck me as just a bit glib to shrug off mounting debts to foreigners.

I can't help but notice that export-oriented countries such as S. Korea and China have boomed, and will soon pass the USA by, if current trends continue (I am particularly impressed with S. Korea).

It is an interesting topic, and I remain unconvinced by classic, traditional or partisan explanations about the virtues or drawbacks of running chronic large trade deficits.

"The world accumulates dollars, in other words, for one very simple reason. Only the U.S. economy and financial system are large enough, open enough, and flexible enough to accommodate large trade deficits. But that badge of honor comes at a real cost to the long-term growth of the domestic economy and its ability to manage debt levels."

Scott M: To simplify the explanation, suppose there are only 2 countries, A and B, and each has its own currency. A buys more goods and services from B than B buys from A. B therefore ends up with some amount of currency A. Currency A cannot be spent in country B. So B must spend its holdings of currency A on something other than goods and services in country A. Candidates for purchase could be bank deposits, bonds, stocks, or real property, for which B would receive a piece of paper signifying title. At the end of the day, net flows of money must be offset by equal and opposite net flows of capital. The trade and capital accounts must always balance.

If I were a Chinese Factory, for example, I would take those dollars, head down to the local bank, exchange them and then invest in my business. Now that the bank is holding dollars, why couldn't they just exchange them for whatever currency they prefer holding?

Love your "continual" explanation of the absolute requirement for accounts to balance. its funny how many people fail to complete the loop. The 2 country example was the classic Econo 101 explanation(and right on the money).

You can always tell those who get it when first presented... and those who don't understand the role of money